The UK’s EU referendum was a big talking point when writing this latest market update on Sweden.
Just about everyone you talk to has expressed a view as we draw closer to the vote.
And it might be of particular interest to Sweden, as it’s not beyond the realm of possibility that the country could follow the UK out of the EU should the Leave campaign win, as a sizeable portion of Swedes are also sceptical of EU membership.
Though no-one really knows what would happen if Leave win, the short-term effect on Sterling is unlikely to be a good one.
The EU aside, Swedish sawmills have been having a better time of late.
While, the latter stages of 2015 was characterised by low prices and an imbalance between supply and demand, plus general uncertainty about market conditions, 2016 is turning out to be a better year.
Sweden’s export volumes of sawn and planed timber were up by about 5% last year – a growth mirrored in its shipments to the UK (up 4.8% to 2.71 million m3), according to statistics from the Swedish Forest Industries Federation.
A glance at the results of Sweden’s sawmills for 2015 showed sobering figures – in some cases showing profitability 400% down as the continued supply and demand imbalance led to price reductions and production cutbacks.
But a significant drop in Swedish inventories in January this year, due to low production and new Chinese demand, has helped change dynamics.
The Swedish Forest Industries Federation said a factor in the market had been a 44% increase in exports to China in Q1, with Sweden’s largest export market – the UK – decreasing slightly (-5%) to 650,000m3 from a relatively high level last year.
The federation said production in Sweden has levelled out after good increases in 2014 and 2015. In January-April production was down 3%.
“There is a different situation for whitewood and redwood,” it added.
“Whitewood production has increased while redwood has decreased as a reaction of the market conditions.
“Whitewood has a really good market, driven by increasing building activities in most part of the world: slow but steady increase in Europe, even higher increase in housing in the USA and increasing market shares for Swedish whitewood in China (mainly for furniture production). And not least very good building activity in Sweden, our single largest market.”
The Middle East and North African markets (mainly Egypt) are important for Swedish redwood and those markets have been more challenging since last year. In Egypt, Swedish exporters have been facing strong competition from Russia, not least because of the devalued rouble. The low oil price as well as geopolitical problems in this region also contributes to the subdued activity.
“The strong demand of wood on most markets has held up the shipment volumes. Together with slightly lower production this has led to decreasing inventories at sawmills each month of the year this far, which is unique,” said the federation contact. And of course, prices have increased this year.
Production in South Sweden stands at a very high level in relation to available raw material, with the latter being a “structural” constraint to production.
South Sweden mill rationalization
The competitive situation in South Sweden is leading to mill closures or sales, with Jarl Timber’s impending sale to Bergs Timber a recent example.
One high-ranking Swedish sawmill executive told TTJ that acquisitions of smaller mills and specialisation of production units would continue.
“There is too much production in the region and the logs are not readily available and the price is too high.”
“This development will develop faster in the future and I think many of the private mills will disappear or see a change of ownership.
“If you look at most other sectors such as cement, then sawmilling is the least streamlined and that is quite bad for the profitability of this sector.”
With several “super” mill sites with big production output, he can’t see the situation improving.
However, general market conditions have been more stable in recent months, with lower production rates and a growth in exports to China leading to a healthier supply/demand balance.
China’s total timber import volume was as high as 800,000m3 in January-April – somewhat out of the blue – not a million miles off the comparative import figure for England.
“Such large volumes put demand and supply back in order,” he added.
“In the future we will look to China. The Chinese government are introducing forest cutting restrictions with their national forests which will mean they will have to import more.”
He reported that the North African market was now improving for Sweden, helped by a measure of withdrawal of Russian timber from the market.
Price increases
Several contacts estimated UK prices for imported Swedish timber had risen up to 10% this year, depending on specification.
“The price is going up now and not only in England, but also across European markets,” said a contact. “It’s more so in England because the pound is weaker.”
“It’s gradual, it does take time. I do not see we need to increase prices further though. We are making good money now and increasing prices further could create a downward cycle later on which would not be good for Sweden.”
Q2 is expected to see a dramatic improvement in Swedish sawmill profitability over previous months.
“But if there is a Brexit, then there would have to be further price increases!
“It would affect the market for a while but in the long-term I do not see sawmills and timber as political.”
“We have raised the prices quite a bit this year.”
One UK importer suggested the punitive krona/sterling exchange rate was continuing to cause difficulties for mills despite a measure of price increases.
“Despite their best intentions, they are not clawing back the currency losses over the last eight months,” he said.
“From a buyer’s perspective there are some gaps in specifications and there may be some shortages.”
He still sees a wide variety of prices at the bulk end of the market.
“End-users had expected prices to be higher. The fact that they haven’t indicates there is still stock on the ground which are not reflecting replacement costs.”
He thought the pound was currently in a false situation and the exchange rate should be nearer €1.42.
He admitted a Brexit vote would put mills under pressure to raise prices further but he personally doubted that the pound would drop too much.
The contact also pointed to the fact that buyers in Holland, Denmark and Germany were increasing their Swedish wood purchases and were prepared to pay more.
Another UK importer said he had done a fair amount of Q3 Swedish wood business with regular customers.
“The market itself is very busy. We did a lot of contracts a few months ago – everybody came to the table and prices had started to go up.
“People were not too concerned about a slight price increase.
“There’s probably less spot business now than in a normal market.”
He estimated price increases from February-June averaging around 10% depending on product specification.
He believes a further small price increase will follow in Q3.
“The stocks are average and if we have better weather here we can see a further uptake in volume. But people are a bit cautious at the moment.”
Sodra’s Strategic UK move
The purchase of the rest of Crown Timber by shareholder Södra was one of the big stories so far this year.
Södra previously held approximately 20% of the shares in Crown, which posted sales of nearly £120m in 2015.
“The UK is our principal export market,” said Jörgen Lindquist, interim president at Södra Wood in the press announcement.
“This acquisition gives us valuable control over the entire supply chain – from the forest to the end users – and provides potential for growth,” he said.
Gaining control of the supply chain will also help it exert a measure of control over UK pricing.
Södra broke its record for construction timber sales in the Swedish market during both April and May.
The figures for May also hit an all-time high – representing Södra’s largest delivery to the Swedish building materials market in a single month.
The Swedish market accounts for 35% of the total market and is the largest single market for Södra’s sales of construction timber to industry and the building trade.
“All in all, the result for 2016 is expected to be somewhat better than in 2015,” added one sawmiller.
All eyes will now be on the EU vote on June 23 and how much the currency could be affected by a Brexit decision and how much the pound could strengthen if the Remain campaign wins.
